The New York Times recently ran an article ("Loan by Loan, the Making of a Credit Squeeze" by Steve Lohr, Aug. 19) which tells the tales of three families who have fallen victim to overwhelming credit card debt, bankruptcy and even foreclosure due to forecasted promises by their lenders during the housing boom. Across the country this scenario is the same for many first-time homebuyers who are now losing more than just their houses -- they are losing faith in the American dream and trust in our banks and mortgage lenders. In the early 2000s, many predatory lenders lured prospective buyers with zero-down, fixed-year terms and interest-only loan offers with reassurances of a climbing housing market and a "no-end-in-sight" era of decreasing interest rates as idyllic. But what these predatory lenders neglected to inform their clients about was with these high-risk mortgages comes the need to plan accordingly should the housing market decline and/or if lower rate re-finances were not available at the end of their terms, both of which happened. It seems like common sense to simply save for the upcoming change in your mortgage payment when you knew about it years in advance, but coping with unexpected household expenses, such as a new roof or appliances; pressure to keep up with the Jones through remodels; and the ability to purchase more or consolidate other debts through home equity lines of credit has created a foreclosure crisis which likens itself to a train wreck we can't seem to avoid reading about. This article is not another attempt to blame the predatory lenders in mortgage industry or the Feds, who control interest rates, or to sell consumers the latest and greatest financial product. This article is about encouraging consumers to move ahead and arm themselves with a greater knowledge on how to properly manage the income they earn and how not to succumb to home and credit card debt. The way consumers can do this is by seeking financial literacy education and counseling from a professional credit counseling agency. Several decades ago, as credit became more and more abundant, so grew the default rate on mortgage loans and credit cards alike. In order to limit these losses, creditors designed debt-pooling and designated nonprofit organizations to provide consumer credit counseling services (CCCS) to educate and counsel consumers on how to use budgets, pay down debt and avoid misuse of credit.
Debt-pooling, also known as a debt management program, is a payment plan wherein consumers can combine their monthly payments into one single payment to be distributed to their creditors by a CCCS agency. Upon enrollment in a debt management program, the agency you are working with will provide you with a financial analysis (usually at small set fee) to determine an affordable monthly payment and schedule. Then they'll contact your creditors to request benefits, called concessions, such as a reduction in interest rate, the elimination of over-the-limit and late fees, and to set up a new due date for your payment. This allows consumers to manage their living expenses and have a definitive date to become debt free.
To start this process, you must go through a credit counseling session (which is confidential and free of charge) to determine the correct solution for your financial situation. Three options usually appear from counseling sessions: some can handle finances on their own with some strict budgeting, some individuals need a bit more help and are eligible for a debt management program, and others may be too burdened and should consider filing for bankruptcy. The credit counseling industry has recently experienced the strictest regulation mandates (from the federal government) in our existence. With these new guidelines it is now safer for consumers to locate a valid nonprofit agency and ask for help. Credit counseling agencies are regulated by the credit card companies, which helps to ensure that consumers and their credit card debt are handled properly. Creditors are calling for the credit counseling industry to teach people how to build a financially healthy future. While you cannot enroll your mortgage into a debt management program, if you are overwhelmed with bills and credit card debt enrolling in a debt management program may help you avoid bankruptcy, get on the right track to paying down your debt, keep you from getting in arrears or potentially foreclosure. Be aware of credit, home loans and financial products that seem too good to be true. Check out the pros and cons of any financial move before you make it. Don't just trust the source offering the great rates because they've been in the business for X amount of years. Utilize the Internet and check out the FTC Bureau of Consumer Protection (www.ftc.gov/bcp/consumer.shtm) to get the facts and information you need to avoid falling prey, and to make sound decisions. Take advantage of the many free financial literacy educational services and credit counseling out there that will teach to you avoid and eliminate debt crisis and how to save for that dream home, not just borrow. And above all, teach your children what you learn. Make the next generation of consumers one of savers, not spenders. Diminish today's accepted standard that "everyone has debt" and create a Debt-Free America.
Pace is the director of education for Debt-Free America, a nonprofit community service organization offering confidential credit counseling, debt management program options and financial literacy education to consumers of all ages and income levels nationwide.